• Strategy
  • CFO Europe Magazine

The Rich List

Some companies are better at turning cash into shareholder value than others.

In the fast-consolidating steel sector, with multi-billion euro megadeals now commonplace, Salzgitter has kept a low profile. In March, when news broke that the German steel group was sizing up Algoma, a Canadian rival, expectations of a bidding war among cash-rich trade and financial buyers pushed the share price of Salzgitter’s target sharply higher. The German company backed away from a deal.

“For the time being, it’s difficult to find anything in steel for a realistic price,” says Heinz Jörg Fuhrmann, Salzgitter’s CFO. No matter: the €8.4 billion company has managed to grow revenues, largely organically, by an annual average of 13% over the past five years, outpacing global steel production growth of 9%. Even more impressively, Salzgitter’s pre-tax profits have increased 63% a year over the same period, while last year’s return on capital employed of nearly 50% smashed the company’s 12% target. Shareholders responded by driving up Salzgitter’s share price from €8 at the beginning of 2002 to more than €135 in late October 2007.

Thanks to its stellar performance, Salzgitter ranks in the top ten of a global sample of more than 600 large, listed firms (excluding financial institutions) in terms of total shareholder return (TSR) over the past five years. That’s according to a new analysis for CFO Europe by The Boston Consulting Group (BCG). (See “The Value Creators.”)

Given its 65% five-year TSR, Salzgitter has had the luxury of piling up cash on an underleveraged balance sheet at a time when investors are pushing many companies to make big payouts to shareholders. Despite doubling its dividend, Salzgitter now holds more than €2 billion on its balance sheet in June. Its debt-to-equity ratio fell from 261% in 2002 to 102% in 2006.

Although the cash cushion is “very comfortable,” says Fuhrmann, “from a long-term perspective, we cannot deny that it is too much.” While near-term prospects for the company’s main line of business remain bright, “these extraordinarily good times will end one day,” the CFO says. When that time comes, a large cash pile will ensure that “our ship won’t sink when the first storm comes.” What’s more, the company’s spare debt capacity will allow it to snap up less fortunate rivals during a downturn, “when nobody else is interested in acquisitions in steel, in contrast to the situation today,” Fuhrmann says. As the company bides its time, a number of important capex projects are under way to bolster organic growth.

Building for long-term growth is, of course, what business schools have been preaching for generations. But conventional wisdom has been changing, says Eric Olsen, senior partner in the Chicago office of BCG, a global business-consulting firm. What was once viewed as a strong balance sheet is increasingly viewed by analysts and investors as a lazy balance sheet — one that under-exploits a company’s assets, either by holding too much cash earning low rates of return or by having too little debt. (Olsen says the credit crunch hasn’t changed that perception, except perhaps in sectors directly affected by the crunch, such as mortgage lending.)


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